Friday, January 02, 2009

We have two tier-1 firms out cautious or even negative on Satyam Computer (NYSE:SAY) this morning:

- UBS notes Satyam stock has rallied more than 25% over the past week on increased probability of a management change. While they think a smooth management change would be positive for the stock, the market has not factored in a potential disruption to business caused by uncertainty by the management/ownership change, in firm's view. New contract wins will be the first to be impacted; additionally Satyam faces competition from TCS/Infosys Technology (INFY) in its existing client base in an already challenging demand environment.

Among Satyam’s large accounts, TCS also has a meaningful relationship with General Electric, Citi, Merrill Lynch, Applied Materials, Kimberly Clark and Qantas, and INFY has meaningful relationships with Telstra, Reuters and Citi. UBS sees higher risk to Satyam where TCS is also a vendor, as Satyam and TCS pricing differential is lower then Satyam and INFY pricing differential. A prolonged period of uncertainty would be detrimental to Satyam.

UBS also notes Satyam underperformed TCS and Wipro by only about 6% in 2008, despite negative implications of the aborted Maytas transaction. They see higher risk to Satyam’s earnings in FY10/11, compared with INFY/TCS/Wipro. Reiterates Sell rating on Satyam.

- JP Morgan says that while they have not heard of any specific instance so far, they believe that Satyam could see some business pull-back from top global customers if the corporate governance issues continue over the next few weeks. Further, they believe that Satyam employees are uncertain over future leading to low employee morale and several people are looking for options to exit the company.

They are reducing FY10/FY11E revenue estimates by 10-11% and EBIT estimates by 17%/13% respectively.

Satyam’s stock has rebounded sharply over the last couple of weeks largely due to cheap valuations and possibility of new promoter emerging. However, fundamentals remain weak and the firm believes that confidence in management would be difficult to rebuild - they see a new management team with new promoter as the only quick way to restore investor confidence.

Reits Underweight.

Notablecalls: The shares are reportedly trading down 4% in India, mostly due to concerns over renewal of existing contracts by clients.

A local analyst is quoted saying, "Concerns over corporate governance issues at Satyam might make its existing sourcers and vendors jittery before renewing their contracts."

This spells trouble for Satyam in my opinion.

Must say I would not be surprised to see the stock retrace some of the recent bounce gains.